Banks are required to classify nonperforming assets into various one of three categories – namely Substandard, doubtful, and loss. The assessment classification is a continuous process and a very important parameter for risk analysis for any commercial bank.

Task 1

From the tasks given below identify under which of the 5 asset classification categories will the asset be classified.

1. a. Ashara LLC a leading manufacturing company in Oman borrowed funds from Bank Brightline on the 1^st day of the year 2021. The company served the loan regularly for 8 months and always maintained Standard status. In September 2021 one export order of the company got canceled. The company delayed payments to its creditors by 60 days. The company also requested banks for extended overdraft limits and agreed to pay 2% higher rate of interest on the same. The security pledged with the bank for the term loan had a joint lien for 1 more loan. In December 2021 there were big changes in the senior management of the company. The Pandemic affected the export trade of the entire manufacturing industry.

b. Abu Zaki, a retail store owner in the city of Muscat borrowed funds from Bank Supreme on 1^st September 2020. The customer was planning to open a new store in the prime location of the city. The customer is a very prestigious citizen of the town. He served the loan regularly in the initial period. After a year, the accountant of his business did not submit budgeted data for the next year. Also, another customer of the bank, who happened to be Abu Zaki’s supplier informed a bank official about delayed payment by Abu Zaki. On further investigation, it was found that the overdraft facility was outstanding for 25 days with another bank and there was an application of an extension to the credit facility on the overdraft. Abu Zaki also recently contacted an advertising agency for drafting an ad for a sale on all products of his business. A cheque given to Abu Zaki by a customer bounced last week.

Required:

1. Identify the category of an asset from the data given in point a based-on analysis of the indicators discussed. 5 marks

2. Identify the category of an asset from the data given in point b based-on analysis of the indicators discussed. 5 marks

3. Presentation of the topic 2 marks

( classify the given asset in the appropriate category and justify all the indicators based on which the asset is classified.